When buying life insurance, an insured amount is paid out to the beneficiary upon the death of the insured. The policyholder pays a regular amount, called premium, in order to receive the coverage. These premiums are based on factors, such as age, gender, medical history, and the value amount of life insurance you purchase.
In case something unfortunate happens to the insured, the life insurance will provide money directly to the beneficiaries. A life insurance doesn’t only provide protection, but also is a form of financial planning, as the beneficiaries could use the money for:
Making up for your lost income
Funding a child’s education
Paying off household debt
Certain types of life insurance may provide benefits for you and your family while you are still living. Some policies will offer a payout upon maturity or when surrendering. However, the different types of life insurances are priced differently.
The main categories of life insurance
In general, they are divided into three broad categories:
Term Life Insurance
Permanent Life Insurance
Endowment Life Insurance
Term Life Insurance: A term life insurance offers coverage for a chosen period. This type of life insurance only offers the insured payout to the beneficiary upon the death of the insured within the chosen period. The policy will lapse if the policyholder stops paying premiums. Term life insurance is comparatively more affordable, as it doesn’t offer any maturity payout.
A term life insurance is an ideal choice for those who need to protect their family from financial risks over a specific period of time, such as during loan repayment.
Permanent Life Insurance: This type of insurance offers coverage for the whole life of the insured. The policyholder has to pay premium either for a specific time period or throughout their lifetime. This insurance will provide payout to the beneficiary of the policyholder in case of insured’s death. This life insurance also offers a surrender value, if the policyholder chooses to lapse the policy before its maturity.
Some permanent life insurance policies also offer a regular pension payout after contributing for a certain period. Such pension payouts can be received monthly, quarterly, semi-annually or annually.
Endowment Life Insurance: This insurance is a mix of term life and permanent life insurance. It provides coverage over a specific period, while offering surrender and maturity benefits. You will receive a lump sum payout at the end of a chosen period. Some policyholders have used this kind of policy to save a specific sum for their children’s higher education.
How much life insurance do I need?
Your goal should be to develop a life insurance plan that compensates your family for the loss of your income after your death. Below are two ways to determine how much life insurance you may need.
1. Calculate the replacement income need. This method helps to determine the financial contribution you will make to your family from now until you retire. This amount helps determining how much life insurance you will need. It calculates more than just replacing your income, as it also takes into account everything you provide to your family, including:
Benefits/ health insurance
Personal services you perform for your family, such as childcare, cooking, home maintenance
Your personal consumption – annual spending on personal needs, such as food, clothing, entertainment
2. Survivor needs analysis. This method calculates the amount of income that is needed for your surviving spouse and children to maintain their desired level lifestyle. Your family’s needs are then compared to their assets, existing life insurance and other income sources to determine any additional life insurance requirements. An insurance agent or financial advisor can help you determine an accurate figure and choose appropriate coverage.